Gale Pacific expands

On Wednesday,
Gale Pacific
announced it had acquired the businesses of Zone Hardware and Riva Window Fashions. Gale Pacific has an established position in the outside shade coverings market, and these acquisitions will be a good fit with the business as it will provide entry into the indoor window coverings sector.

The acquisition of Riva is a particularly important one for Gale Pacific, as it caters for a niche market that is growing rapidly. From a broader perspective, the window coverings industry is competitive with the likes of Kresta and Victory having the benefit of brand power and an established market position.

However, the Riva business won’t be competing directly with the likes of Kresta, and importantly it won’t have the high fixed overheads of maintaining retail outlets. I spoke with Gale Pacific’s managing director, Mr Peter McDonald, regarding the acquisitions.

He is particularly excited about the growth potential that lies in the Riva business. Mr McDonald pointed out that custom-made window furnishings made exactly to the consumer’s window measurements and specifications were a fast-growing product line that had already taken off in the United States.

Apparently, custom-made window furnishings now account for 50 per cent of sales at large home and hardware outlets such as Home Depot. Gale Pacific will be adopting a similar strategy in terms of marketing the product, as it will be stocked throughout Bunnings Warehouse’s 200 stores.

This in effect removes the need for Gale Pacific to establish and maintain its own retail outlets. Zone Hardware operates in a similar manner, specialising in the distribution of branded home improvement products that are sold into do it yourself (DIY) mass merchant and specialty retail outlets.

The combined annual revenues from Zone and Riva are currently $17 million, but there appears to be significant scope to build on this. Mr McDonald said the consideration of $13.5 million represented about 3 times earnings before interest and tax for the businesses, indicating they are achieving above-average industry margins.

This also highlights the significance of the transactions for Gale Pacific. The addition of the implied EBIT of about $4.5 million translates into an earnings boost of about 50 per cent relative to the company’s current earnings profile.

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Mr McDonald said the company was still on track to achieve a slight increase in earnings over the previous corresponding period in 2010-11. This will place Gale Pacific on a price-earnings ratio of less than 10, and with the prospect of substantial growth from these acquisitions in 2011-12, the company presents as good value.

A cooler than expected summer combined with the impact of floods created challenging conditions in the past six months. The fact that Gale Pacific’s revitalised management team is poised to deliver on its profit guidance as well as position the company for growth in 2011-12 is encouraging for its shareholders.

After a lean period between 2006 and 2009, the company now appears on track to sustain its recovery. It may be one to watch in August, as management delivers its full-year result and updates the market regarding the progress of Riva and Zone Hardware.